CORPORATE REAL ESTATE'S ongoing labor pains

With shortages in many U.S. markets for key technology positions, the most critical factor in corporate space selection has become labor force availability. Companies are more focused this year than in the past on creating a full and competent staff than on the traditional tenet of reducing labor costs.

Considerations such as marketplace, accessibility, quality of life and business climate - including operating costs, taxes and incentives - are still crucial factors. But today, if a region cannot provide skilled labor, companies will look elsewhere.

At Chicago-based Bank One, real estate strategist Ken Johnston says a quality labor force is the key determinant in his criteria. "Several factors lead the list, headed by quality labor and affordability," he says. "These are not real estate issues, but if the labor force isn't right, we don't even need to begin a real estate search."

Johnston says several U.S. markets are so saturated that skilled positions simply cannot be filled. Companies can make a major mistake by investing in an area without thoroughly examining labor force availability. "I sound like a statistician, but the issue is critical," he adds. "Companies have a good chance of blowing the move if labor isn't analyzed.

"I am responsible for focusing on just a few states, and there are half a dozen other real estate strategists just like me here," he continues. "The mere fact that we have these positions at Bank One today tells you that we're spending much more time trying to figure out where we need to be."

Strategies in site selection At New York-based Cushman & Wakefield, Mike Henderson, director of location analysis, says labor is the most important factor affecting where his company's clients are locating. "The driver for all our clients today is finding the right number of people with the right qualifications at the right price," he says. "It's a key issue."

Henderson says Cushman & Wakefield recently assisted Austin, Texas-based Dell Corp. in a site selection, and that, for the first time, this client looked outside of central Texas for expansion due to skilled labor issues. He says Dell selected Nashville, Tenn., for the new manufacturing, assembly, distribution and office facilities for several reasons - but primarily because other major computer companies are not yet in the area. This positions Dell as the region's highest profile computer firm, creating a stronger draw of technical employees, as well as an array of incentives from a city that wants the 3,000 job openings Dell provided.

"We needed to expand on the pool of skilled labor from which we glean our employees," says Cathie Hargett, manager of public affairs for Dell. "Central Texas offers a lot of technical employment, but Nashville does not. Mid-Tennessee also provides a close proximity to about 60% of our customer base. In addition, Nashville feels very much like central Texas to us in terms of the community's culture and quality of life. It's a good match of personalities."

The ability to attract skilled labor definitely has become more important in site selections in today's economy, according to Bruce Schuman, senior vice president of Julien J. Studley in Los Angeles. As companies look at the cities and buildings in which they want to be, the ultimate decision is revolving around hiring and keeping primarily technical employees.

"Our clients no longer look as hard at the best, lowest cost building, but at how the location and facility impact their ability to acquire and retain skilled workers," he explains. "We're not hearing them say that they can't find a building, but that they can't find the people to fill their technical positions.

"Real estate today must act as a human resource tool by offering the right amenities that attract the right people," continues Schuman. "Especially with the high-tech companies we represent, facilities issues are centering around providing employees with a great place to eat lunch, ride bikes and take a walk. Years ago, outside lunch areas and walking paths were luxuries. Today they're demanded. Companies need to provide these amenities to attract today's young, high-tech labor force."

As companies seek these amenities - and market them as part of a competitive package that has traditionally included higher wages and enhanced benefits - there is a growing propensity to move away from traditional high-rise office buildings. The trend, especially among technology companies, is toward low-rise, almost "anti-corporate" environments, says Schuman. This movement has resulted in today's growth in creative, campus office communities typically located outside a CBD. These informal campuses include park-like pedestrian settings as well as high-end, subsidized food courts; fitness facilities with personal trainers and towel services; daycare; and on-site medical services.

Adrianne Court, director of facilities for Dallas-based i2 Technology Inc., confirms that, in some saturated markets where technology firms are clustering, services that make employees' lives easier are strong factors in the cost of build-out. "The primary focus in finding a new location for our corporate headquarters was to have the feeling of a campus surrounded by greenery, not a stark building positioned on concrete, with plenty of amenities," says Court. "One of the reasons we selected this particular site is because it backs up to a park with a great view of a lake."

Cleveland-based Progressive Insurance is another firm using a campus approach to attract employees. States Lou Bloomfield, Progressive's senior real estate project manager, "One of the ways we address today's short labor supply is with a campus of buildings filled with amenities such as fitness and medical centers, bank machines, food services, outdoor facilities and more, all of which help attract and retain employees. Progressive Insurance maintains two campuses in Cleveland - one as part of its 600,000 sq. ft. headquarters facility, and a 450,000 sq. ft. campus complex now under construction - and a third, 330,000 sq. ft. campus in Tampa."

Hub-and-spoke approach Progressive Insurance also competes for call center labor using a hub-and-spoke approach to tapping into labor markets, a strategy now being tested and seriously considered for future roll-out. At CLW Real Estate Services of Tampa, Fla., which represents this major insurance company in its site selections, principal Doug Rothschild explains the hub-and-spoke concept.

"Particularly for today's call-center operations, a company might place a hub of the maximum size that can be supported by the labor available in that general market," he says. "Multiple spokes of smaller centers are then positioned at various distances from the hub. Those distances depend on the peripheral labor markets, type of operation and how well the people can operate and be managed effectively from afar."

Though in its embryonic stages with Progressive, the hub-and-spoke approach has some marked advantages, according to Bloomfield. "The advantage of the hub-and-spoke approach is the ability to tap additional labor markets without excessive infrastructure costs," he says. "By utilizing the major hub location's major telephone switches, we can seriously reduce costs in the spoke locations."

Labor's not the only thing Though labor is the hottest issue in the corporate space arena right now, other factors in site selection are also heating up, including consolidation activities, speed to market, access to fiber optic routes and infrastructure capacity, with different industries focused on different paths.

In the banking industry, corporate consolidations in particular play a major role in facility positioning. At Bank One, which merged with First Chicago in the spring, the final touches are still being placed on its strategic consolidation plan, with some projects already under way.

"On a macro view, we're looking at key cities in which there are large concentrations of employees, and examining the lines of businesses there to ascertain whether those businesses will grow, decline or shift to other markets," says Johnston. "In some key cities we have excess space, but it may not make sense for us to go there. Other markets are tight, both in terms of our own inventory - though we like to keep it managed that way - as well as current and future availability.

"Overall, our space decisions start with understanding and partnering with our lines of business, because they are the key drivers in our consolidation efforts," Johnston adds.

Conversely, many young technology companies see space as a necessary evil for getting product to market faster. "Competition is severe in the telecommunications market, and the race is on for space," says Martin Peck, director of brokerage services for Dallas-based Trammel Crow Co. "Companies are coming to us with 10- and 20-location projects that need to be established in multiple cities all at the same time. In many cases, access to a fiber-optic route is a key determinant in the site selection. All this is forcing us as real estate professionals to become telecommunications experts as well."

Schuman of Julien J. Studley, which represents many high-tech firms, confirms that part of the review process for growing telecommunications companies, now more than ever, is the fiber loop in the area and the cost of bringing in certain sized cables for high-speed communications. "In the old days, you picked a nice building and brought in some phones," says Schuman. "Today network access is a major part of the upfront analysis."

Schuman says a recent decision by a client to select one 10,000 sq. ft. location over another ultimately was determined by the cost of supplying high-speed phone lines. "This is a typical scenario today," says Schuman.

Some companies in employee-intensive industries like insurance are part of the trend in renovating older big-box retail locations into high-density office space. Costs are low, parking ratios are high and amenities like fast food restaurants, printing facilities, dry cleaners and shopping are generally nearby.

"The problem is that some of the older big-box structures do not offer adequate HVAC, power and floor load capacities, which often cannot be increased cost effectively," says Rothschild.

Rothschild reports that HVAC in particular has become an issue in site selection. "Many companies are very focused on bringing in more than an adequate amount of fresh air into the workplace," he says. "We've seen companies turn down some good, established buildings because the HVAC system couldn't be expanded without a complete overhaul."

And with more employees and computers packed into tighter configurations, some buildings do not measure up to a company's needs. "A new twist in increased densities is that many otherwise desirable sites can't support the electrical, HVAC and parking requirements of a large financial services firm like ours with extensive back office operations," says John Ferrari, assistant vice president and manager of corporate real estate for the Liberty Mutual Group of Boston. He says the company's targeted occupancy is 180 rentable sq. ft. per person and about 5.5 parking spaces per 1,000 employees, which is higher than normal in most markets.

Ferrari also notes the increasingly delicate balance between the cost of any site and that building's ability to support the business operation. "We are looking much harder at whether the quality, aesthetics and cost differential between Building A and Building B can be supported in increased productivity on the part of the business unit or increased sales," he says. "The realities of doing business today are that small differentials in cost have gotten harder to justify. In the past, a $20,000 differential was acceptable, but that's hardly the case today."

Added incentives At New York-based KPMG, George Tobjy, a senior manager in the strategic relocation and expansion services group, says there is a definite trend for companies to focus their site selections on areas which provide the biggest government incentives. He explains that there are a number of states that offer "revenue neutral" incentive programs, which reward companies heavily - usually in terms of tax credits or grants - for creating jobs in the area. Tobjy says Kentucky, Ohio, New Jersey, New York and Tennessee have creative incentive programs that have resulted in strong numbers for new facilities during the 1990s.

Bob Perales, manager of corporate facilities for San Jose, Calif.-based eBay Inc., a consumer online trading company founded in 1995, says his company's recent choice of Salt Lake City for a support location was driven by the support and incentives offered by the city, second to available labor. "Flexibility and expansion are two of our key pending programming requirements," says Perales. "When a relocation job requires a fast track schedule, which is the case here lately, support from government agencies is crucial. From a facilities perspective, we also look at the lead time required to complete a voice/data installation, and the speed with which the approval process goes from owner to government agency to construction."

The construction management for tenant improvement for eBay's 72,000 sq. ft. new building in Salt Lake City was handled by Washington, D.C.-based CarrAmerica Realty Corp., which also built and owns the facility. Dwight Merriman, managing director of CarrAmerica, notes that many firms, like eBay, are choosing sites with larger floor plates of 25,000 sq. ft. to 30,000 sq. ft. and column spacing of 30 ft. to 33 ft., to accommodate the increased use of modular furniture and partitioning. To minimize the visualized tunnel effect sometimes created by modular elements, taller, 10-ft. ceilings are also part of the trend.

At Bank One, another factor that plays heavily on site selection is whether the company already has an operation in that area. With every new or expanded location, an emphasis remains on the workforce, supported by a complete assessment of how the move will impact where employees will live and how they will get to work.

"In a recent move, we chose to remain in Dallas, effecting the largest new lease in downtown Dallas in 1998," says Johnston. "Moving from just four blocks away, we joined existing operations in a three-building campus, tightening our footprint with more than 1 million sq. ft. of space."

Johnston says the biggest motivation in the move was retaining existing employees, as well as attracting new workers and keeping a core group of departments together.

Access to transportation remains a key criterion for companies that require extensive travel, says Thomas Hynes Jr., president of Boston-based Meredith & Grew Inc*ONCOR. He points to Arthur D. Little Inc., and the 360,000 sq. ft. the consulting firm leased in June in Watertown, Mass. The site, which will be the company's new headquarters, is easily accessible by road and air, also major factors.

"Our staff probably does more traveling than any other firm in the Boston area," says Sam Gallo, chief counsel and senior vice president of Arthur D. Little. "We also have a great deal of client visitation. Therefore, a key criteria in our site selection was its proximity to the Massachusetts Turnpike as well as to Logan Airport." Gallo says the company selected Boston to retain its investment in the area, where the company has been since the 1950s, and to prevent staff relocation.

With attraction and retention of labor at the pinnacle of importance in site selection, companies work hard to find and keep employees. That is the good news. The bad news is that, if the squeeze on skilled employment continues, site selection will become an even trickier process. The silver lining: that could open unlimited real estate opportunities in emerging markets.